In a decision last week, Judge Ewing Werlein Jr. of the U.S. District Court for the Southern District of Texas addressed the question of whether an employer had successfully alleged a claim under the Computer Fraud and Abuse Act (“CFAA”), such that the employer could properly bring its numerous claims against former employees and their companies in federal court. He ruled that the employer had properly pleaded the CFAA claim, and that as a result, the court had subject matter jurisdiction over the case. Beta Technology, Inc. v. Meyers, Civ. No. H-13-1282, 2013 WL 5602930 (S.D. Tex. Oct. 10, 2013).
Before we get into the substance of the decision, some background is in order. Subject matter jurisdiction is an important issue for federal judges. If there’s no basis for subject matter jurisdiction, a case doesn’t belong in federal court. First-year civil procedure students learn this rule from the venerable decision in Capron v. Van Noorden, in which the Supreme Court allowed a plaintiff to obtain reversal of a final judgment because he hadn’t properly alleged that the court below had subject matter jurisdiction over his claim.
The two main categories for federal jurisdiction in non-criminal cases are diversity jurisdiction and federal question jurisdiction. Diversity jurisdiction, as defined in 28 U.S.C. § 1332, permits the federal courts to hear disputes between citizens of different states – i.e., “diverse” citizens – so long as more than $75,000 is at stake. Federal question jurisdiction, which is defined in 28 U.S.C. § 1331, allows the federal courts to address “all civil actions arising under the Constitution, laws, or treaties of the United States.” And under 28 U.S.C. § 1367, once the court has jurisdiction to hear one claim, it can hear any other claims that form “part of the same case or controversy,” even when those claims drag additional parties into the mix.
Usually, a plaintiff feels pretty good when he gets the opposing party to sign a settlement agreement promising to pay him money. It’s nice to wrap up a hotly disputed case and move forward with the assurance that you’ll get what is promised under the settlement.
But then there’s the unusual case of Joe Martinez. Martinez was the president of Rocky Mountain Bank before the bank fired him in 2010. His contract entitled him to one year’s base pay ($200k) if he was terminated without cause. However, he didn’t get the money after he was fired, because three months earlier, the Federal Reserve had notified the bank that it was in a “troubled condition” as defined by federal regulations. If a bank’s in a “troubled condition,” under rules established by the Federal Deposit Insurance Corporation, it can’t make a so-called “golden parachute” severance payment.
Martinez quickly sued for the money due under his employment contract, and eventually negotiated a settlement with Rocky Mountain Bank for $100,000. The bank told Martinez that it needed to get approval for the payment from the Federal Reserve. Shortly thereafter, the Federal Reserve told the bank that it couldn’t pay. As a result, Martinez had to ask the district court to enforce the settlement, which it refused to do.
Last week, the Tenth Circuit affirmed the district court’s decision on three grounds. Martinez v. Rocky Mountain Bank, No. 11-8076 (10th Cir. Oct. 4, 2013).
Joseph Guinn’s case started with a phone call. Leigh Sargent, the president of Applied Composites Engineering (“ACE”), made the call. Randy Sutterfield, an executive at AAR Aircraft Services, Inc. (“AAR”), was on the other end of the line.
The subject of Sargent’s call was Guinn, who at the time was employed by ACE as an airline mechanic, but who had given notice that he intended to leave ACE and join AAR. Sargent told Sutterfield in no uncertain terms that “Guinn was under the terms of a non-compete agreement and that he believed that it was a violation [for] him to come work for [AAR].” Guinn v. Applied Composites Engineering, Inc. (Ind. Ct. App. Sept. 30, 2013). After some more pressure from ACE, and an (un)friendly reminder that ACE was one of AAR’s customers, AAR knuckled under and fired Guinn.
Unsatisfied with this capitulation, ACE sued both AAR and Guinn. It claimed that Guinn had breached his employment agreement by accepting the job with AAR, and that AAR had intentionally induced the breach. Guinn, now without any job at all, didn’t take this lying down. He countersued ACE for interfering with his own contractual relationship with AAR.
Last week, the Virginia Supreme Court reversed a trial court’s ruling that a non-compete agreement was unenforceable on its face as a matter of law. The VSC held that the trial court should not have decided the enforceability of the agreement on a demurrer (more about what that means below) because, in Virginia, whether a non-compete is enforceable (or valid) turns on whether it is “reasonable under the particular circumstances of the case” – that is, whether it is “narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.” According to the VSC, this means that the particular circumstances of the case matter, and that the enforceability of a non-compete should not be decided “in a factual vacuum.”
When Yu-Hsing Tu worked at pharmaceutical company UCB Manufacturing, he signed a strict confidentiality agreement. In the agreement, Tu promised that he would never disclose any of UCB's “secret or confidential information,” including a laundry list of items such as “designs, formulas, processes, . . . techniques, know how, improvements, [and] inventions.” Tu's work was important to UCB: he helped formulate its cough syrup products, including Delsym, and had significant knowledge of its “Pennkinetic system” for controlled release of cough medication in liquid form.
In 2001, Tu left UCB and started working for his friend Ketan Mehta at Tris Pharma. Soon after, Tu and Tris Pharma began formulating generic versions of UCB’s cough syrups. Six years later, Tris's competitive products were on the market, and UCB lost a lot of market share.
UCB immediately went to court and sued Tu and Tris for misappropriation of trade secrets, breach of contract, and unfair competition. It asked for a preliminary injunction -- a court order early in the lawsuit that would require Tris to stop using its trade secrets until the merits were finally decided. After a five-day hearing focused on the misappropriation claim, the trial judge denied the injunction, maintaining the status quo for Tris.
Shortly after that win, Tu and Tris took the offensive in the litigation, moving for summary judgment. At that point, UCB made a decision that would end up costing it later on: it voluntarily gave up its claim for misappropriation of trade secrets. The trial court then granted Tu and Tris’s motion for summary judgment on the other claims, relying on its finding during the preliminary injunction phase that Tu and Mehta were credible when they testified that they didn’t misuse UCB’s confidential info. UCB appealed.
There’s been another important development in the legal landscape with respect to age discrimination cases, as last week a federal district court in Oklahoma ruled that the EEOC could proceed to trial on behalf of an employee who alleges that she was terminated by her employer for being “old and ugly.” Equal Employment Opportunity Commission v. Kanbar Property Mgmt., LLC, Case No. 12-CV-00422-JED-TLW (Aug. 23, 2013). (Although similar factually, this is a different lawsuit than the “you’re not that pretty” case discussed by our colleague Bill Schreiner last week, which survived a motion to dismiss.)
If you’re not an employment lawyer, this might strike you as the proverbial “dog bites man” headline. After all, if you can't be fired for being old, certainly you can't be fired for being old and ugly, right? Right?
Well, as it turns out, the law isn’t quite so straightforward. Read on….
On Tuesday, we examined the dismissal by a Georgia federal court of Lisa T. Jackson’s race-based discrimination claim against Paula Deen and others, and noted that, under Title VII, an employer may not discriminate against an employee for associating with employees of another race. But we don’t want you to be left with the impression that the association has to be between co-workers. Courts also have recognized “interracial association” Title VII claims for associations occurring outside of the workplace. The U.S. Court of Appeals for the Second Circuit is one such court.
Last week, a federal court in Georgia dismissed Lisa T. Jackson’s race-based discrimination claim against Paula Deen, her brother Earl “Bubba” Heirs, and their restaurant businesses. Earlier events in the Jackson v. Deen case – including Deen’s deposition testimony and what it may mean for alter ego liability – caught our attention at Suits by Suits. This recent ruling interests us as a reminder that it is not always the case that a white employee who works in an environment that is hostile to blacks has no claim for damages against her employer for race-based discrimination.
Corporate mergers aren’t just about the bottom line. They also have a human side, impacting employees who are laid off as a cost-cutting measure and employees whose responsibilities change as a result of the transition.
Contracts between executives and employers can play a role in this transition. Many employment contracts and benefit plans feature change-in-control provisions. These provisions can allow executives to obtain benefits if they are terminated after a change in corporate control, or even if they resign for “good reason” after their responsibilities are meaningfully altered.
In 2006, John D. Clayton, the Director of Worldwide Acquisitions and Divestitures for Burlington Resources, Inc., had one of these arrangements when Burlington merged with ConocoPhillips. Burlington’s severance plan provided a right to benefits if an employee quit for “good reason” within two years of a change in control. If there was a “substantial reduction” in the employee’s responsibilities, that would be a “good reason” for resigning, entitling the employee to benefits upon resignation.
Just before the March 2006 merger, Conoco offered Clayton a position as its Manager of A&D, and he signed a waiver of benefits under the plan. But then, shortly after the merger, it reassigned him to the position of Manager of Business Development. As Manager of A&D, he would have worked with properties that were already yielding petroleum, while as Manager of Business Development, he would only work with exploratory or developmental properties.
Clayton was disgruntled with the change, and filed a claim for severance benefits – without resigning – in August 2006. The trustee of the severance plan denied the claim because Clayton hadn’t actually quit. Clayton worked for Conoco for two more years, but then resigned in March 2008 (within two years of the change in control) and claimed severance benefits. The trustee denied his claim, determining that he had not suffered a “substantial reduction” in his responsibilities and therefore had not resigned for “good reason.”
Clayton then filed a claim in state court. Conoco, however, removed the dispute to federal court, on the ground that the severance plan required an “ongoing administrative program” and therefore fell within federal jurisdiction under ERISA (the Employee Retirement Income Security Act). And in federal court, Clayton’s claim met its end.
When a business adopts a company-wide bonus plan and gives itself discretion to administer it, can an executive bring a breach of contract claim challenging the exercise of that discretion? According to the U.S. Court of Appeals for the First Circuit’s decision last week in Weiss v. DHL Express, Inc., the answer is no.
Jeremy Weiss was a director of national accounts for DHL. In 2007, DHL told Weiss that it had selected him to participate in its “Commitment to Success Bonus Plan.” Under the plan, Weiss would receive a $60,000 bonus if he stayed with the company through 2009, and another $20,000 bonus if the company met its objectives in that year. There was a catch, however: the plan documents gave DHL’s Employment Benefits Committee the “full power and discretionary authority” to administer the plan, and its decisions would be “final and binding” on the participants.
In October 2008, DHL amended the plan, making all $80,000 of the bonus contingent on Weiss’s continued employment, with an installment of $20,000 in January 2009 and the remainder in January 2010. If Weiss was terminated “without cause,” he would still get the money; if terminated for “good cause,” he would not receive it. DHL paid Weiss the first $20k – however, when it terminated him in September 2009, it refused to pay the remaining $60,000, saying that he had been terminated for “good cause” as the result of failing to supervise his subordinates’ billing practices.
Weiss sued for the rest of the money, and the case proceeded to trial on his breach of contract claim.
Yesterday we looked at a California federal court decision in Martensen v. Koch, in which ex-Oxbow executive Kirby Martensen has sued billionaire William Koch, alleging kidnapping, false imprisonment, conspiracy, and other claims related to his alleged treatment at the hands of Oxbow employees at the Bear Ranch in Colorado. Specifically, we looked at what the decision means in terms of whether a court can maintain personal jurisdiction over an out-of-state defendant; in the Martensen case, the clear take-away is that committing any portion of an alleged wrong within a state counts as having committed the wrong within that jurisdiction. So even though most of Kirby Martensen’s kidnapping and false imprisonment allegations relate to conduct that took place in Colorado, because he was allegedly placed on a private plane owned by Oxbow and flown to Oakland, California before being released, the court found that (for purposes of personal jurisdiction) Martensen’s alleged false imprisonment “that began on [Koch]’s private ranch by [Koch]’s agents [in Colorado] continued unbroken until [Martensen]’s release in Oakland, California,” and thus gave rise to personal jurisdiction over Koch in California.
Personal jurisdiction, however, is only the first step in the process of figuring out where you can and should be sued. Personal jurisdiction determines whether a court has any power over you at all, and is based on the principle – expressed in depth in yesterday’s post – that if you have never set foot in the state of Wyoming, you cannot be compelled to appear in Court in Wyoming.(*) But just because a state has personal jurisdiction over you doesn’t mean that state is the best place to handle a dispute. This is the question of venue. Read on.
As you probably know, we here at Suits by Suits have been fascinated by the strange case of Kirby Martensen, the former Oxbow Group executive who alleged that he was kidnapped and falsely imprisoned by billionaire William Koch. We teased for you last week that Koch’s motion to dismiss, to strike, and in the alternative to transfer venue of the case from California to Colorado was denied, and the case will proceed.
Now, we’ve gotten our hands on the judge’s decision and had a chance to review it in depth; particularly if you’re a civ pro geek like me, it’s worth a read. Even if you’re not, the decision helps any potential litigant -- and really, isn’t that all of us? -- understand where we can expect to sue or be sued. Read on....
Almost faster than a pop-up ad, AOL Inc. sued one of its former executives one day after he left the company for another pioneering Internet business – Yahoo, Inc. AOL, which also named Yahoo as a defendant, alleges that Edward Brody’s employment agreements with it prevent Yahoo from hiring him as the head of its Americas sales division.
AOL’s pleading, filed Friday in New York State court, is not yet a full complaint laying out all of its allegations, but only a summons with notice – which under the rules governing New York’s courts can be used to begin a suit instead of a complaint, but only if it includes “a notice stating the nature of the action and the relief sought.” The brief “notice” AOL included tells us a lot: Brody, AOL alleges, is bound by two employment agreements – one dated June 2012 and one dated November 2009. The company – which you may recall started as an online game service for Commodore 64’s and similar early home computers – argues those agreements are enforceable against Brody (who until Thursday was the head of AOL Networks), and “prohibit Defendant Yahoo Inc. from employing and/or using his services during the notice and post-employment restricted periods” in them.
We’ve written at length about the rapidly-changing landscape regarding covenants not to compete, including the first-in-the-nation law in California that essentially prohibits all such agreements, and we’ve kept you abreast of how various states have responded to the California statute, including New York and Massachusetts. (“The State-by-State Smackdown”)
Now, covenants not to compete typically arise in the context of an employment agreement, with the employee agreeing that if she leaves the company (or is fired), she will not flee to the company’s closest competitors. Typically, the question as to whether such agreements are enforceable turns on how narrowly-tailored the covenant is to serve its purpose, which means the determination is generally made on a case-by-case basis. This reflects a balancing of two goals: ensuring free and fair competition in the marketplace, and also protecting a company against rivals seeking to “poach” its employees and potentially steal secrets, practices, and other confidential information. It’s a tough balance to strike, and the parties typically only figure out exactly where the line should be drawn once one party sues the other.
We cover a broad range of issues that arise in employment disputes. Occasionally, we also spotlight other topics of relevant legal interest, ranging from health care to white-collar defense to sports, just to keep things interesting.
Led by Jason Knott and Andrew Goldfarb, and featuring attorneys with deep knowledge and expertise in their fields, Suits by Suits seeks to engage its readers on these relevant and often complicated topics. Comments and special requests are welcome and invited. Before reading, please view the disclaimer.